Securities Act of 1933: Exempt Offerings

The exemption framework is what allows private capital markets to operate alongside the public offering regime.

Small-Issues Exemption Authority

The Securities Act authorizes the SEC to exempt small offerings from Securities Act registration when registration is not necessary for investor protection in the public interest. The statutory ceiling has been raised over time; Regulation A implements the current framework.

Regulation A: Conditional Small Issues Exemption

Regulation A provides a two-tier exemption framework promulgated under the small-issues authority.

The Two Tiers

Common Tier 1 / Tier 2 Requirements

• Form 1-A: offering circular filed with the SEC
• SEC qualification: required before sales (unlike registered offerings, where the term is "effective")
• Testing the waters: permitted before and after filing (issuers may gauge investor interest before committing to the offering)

Selling Securityholder Cap

In Tier 1, selling securityholders that are affiliates of the issuer may sell up to $6 million per 12 months under the offering. The cap controls the use of Reg A to provide affiliates a quasi-public exit route from a small issuer.

Exam Tip: Gotchas

• Tier 1 has a $20M cap; Tier 2 has a $75M cap. Both are per 12-month period, not per offering. An issuer that raises $20M under Tier 1 in March and tries to raise another $5M in October has exceeded the cap and lost the exemption.
• Tier 2 limits non-accredited investor purchases to 10% of the greater of income or net worth. The cap does NOT apply to accredited investors and does NOT apply if the security is listed on a national exchange. The Tier 2 cap is the principal cost of avoiding state blue-sky review.

The Private Placement Exemption

The private placement exemption covers transactions by an issuer not involving any public offering.

Statutory Conditions

• No general solicitation or advertising permitted
• Investors must be sophisticated ("able to fend for themselves"): they must have access to the kind of information they would receive in a registered offering and the capacity to evaluate it
• No statutory cap on offering size or investor count, but the larger and broader the offering, the more difficult to claim "not involving any public offering"

Regulation D Safe Harbor

Reliance on the bare statutory private-placement exemption is permissible, but Regulation D provides a more reliable safe harbor with bright-line conditions through two main provisions:

• The 506(b) safe harbor: unlimited accredited investors plus up to 35 sophisticated non-accredited investors; no general solicitation
• The 506(c) safe harbor: unlimited accredited investors only; general solicitation permitted, but issuer must take reasonable steps to verify accredited status
• Both: Form D filing required with the SEC within 15 days of first sale

Exam Tip: Gotchas

• The bare private-placement exemption has no general solicitation exception; only the 506(c) safe harbor under Reg D allows general solicitation. A firm that runs ads or holds a public seminar to attract private-placement investors has destroyed the exemption. The bright line is whether the offering reaches anyone with whom the issuer or its placement agent does not have a pre-existing substantive relationship.
• The 506(b) safe harbor allows up to 35 sophisticated non-accredited investors, but each non-accredited investor receives detailed information akin to a registration statement. The information burden is what makes most issuers limit 506(b) offerings to accredited investors only, even though the safe harbor technically allows the 35-investor mix.

Accredited-Investor-Only Statutory Exemption

A separate statutory exemption covers transactions involving offers or sales by an issuer solely to one or more accredited investors up to the small-issues statutory maximum.

• No general advertising or general solicitation
• Form D filing required with the SEC
• The accredited-investor-only condition is bright-line: any one non-accredited investor destroys the exemption

In practice, Reg D's 506(b) and 506(c) safe harbors cover most accredited-investor offerings, and this standalone statutory exemption is used less frequently. The exam still tests its conditions because it appears in the statutory text.

Resales of Restricted and Control Securities

The resale safe harbor provides conditions under which sellers of restricted securities (acquired in unregistered transactions) and affiliates selling control securities are deemed not to be engaged in a distribution, and thus not "underwriters" under the Securities Act. Without the safe harbor, an affiliate's resale could be characterized as an underwriting requiring its own registration.

Holding Period (Restricted Securities)

Volume Limitations (Affiliates Only)

Over any 3-month period, an affiliate may sell up to the greater of:

• 1% of the outstanding shares of the same class, OR
• For exchange-listed securities, the average weekly reported trading volume during the 4 weeks preceding the filing of Form 144

For OTC securities (including OTCBB and Pink Sheets), only the 1% test applies; there is no trading-volume alternative.

Manner of Sale (Affiliates)

• Routine brokers' transactions or transactions directly with a market maker
• Broker may receive only customary commission
• No solicitation of orders to buy by the seller or broker

Form 144 Filing

Required if the affiliate's sale exceeds 5,000 shares OR $50,000 in aggregate within any 3-month period. Form 144 is filed with the SEC at or before the broker is given the order to sell.

Current Public Information

Affiliates may sell only if the issuer is current in its SEA reporting (annual and quarterly filings). For non-reporting issuers, alternative public-information requirements apply.

Non-Affiliate Holding-Period Tail-Off

The safe harbor provides a tail-off for non-affiliates: after holding the securities for the full holding period, non-affiliates have no resale conditions at all.

Exam Tip: Gotchas

• A non-affiliate who has held restricted securities of a reporting issuer for 6 months but less than 1 year can sell only if the issuer is current in its reporting. After 1 year, the non-affiliate has NO safe-harbor conditions at all. Affiliates remain subject to ALL conditions indefinitely.
• The volume cap uses the GREATER OF the 1% test and the 4-week average weekly trading-volume test for listed securities. For OTC securities (OTCBB, Pink Sheets), only the 1% test applies. The volume-based alternative requires an exchange listing.
• Form 144 is required when an affiliate's 3-month sale exceeds 5,000 shares OR $50,000. It is OR, not AND. A sale of 4,000 shares totaling $60,000 triggers Form 144; so does a sale of 6,000 shares totaling $30,000.

Resales to Qualified Institutional Buyers

A separate safe harbor covers resales of restricted securities to qualified institutional buyers (QIBs). A QIB is generally an institution that owns and invests on a discretionary basis at least $100 million in securities of issuers that are not affiliated with the QIB.

• Not subject to the retail safe harbor's holding-period and volume conditions
• The QIB-only restriction substitutes for those protections
• Used heavily for high-yield debt and convertible-debt offerings to institutional markets without registration

The QIB safe harbor creates a parallel institutional secondary market for restricted securities. The exam tests it as the institutional analogue to the retail-eligible safe harbor.